[et_pb_section fb_built=”1″ admin_label=”section” _builder_version=”4.16″ global_colors_info=”{}” theme_builder_area=”post_content”][et_pb_row admin_label=”row” _builder_version=”4.16″ background_size=”initial” background_position=”top_left” background_repeat=”repeat” width=”auto” global_colors_info=”{}” theme_builder_area=”post_content”][et_pb_column type=”4_4″ _builder_version=”4.16″ custom_padding=”|||” global_colors_info=”{}” custom_padding__hover=”|||” theme_builder_area=”post_content”][et_pb_text ul_item_indent=”30px” admin_label=”Text” _builder_version=”4.22.2″ header_4_font_size=”16px” background_size=”initial” background_position=”top_left” background_repeat=”repeat” global_colors_info=”{}” theme_builder_area=”post_content”]In this article, we’ll guide you through effective strategies to reduce backorders in your business operations. By the end of this read, you’ll have a comprehensive understanding of how to prevent backorders, improve customer satisfaction, and maintain a smoother supply chain.<\/p>\n
Key Takeaways:<\/b><\/p>\n In October 2017, Apple opened pre-orders<\/a> for its eagerly awaited iPhone X. Within minutes, demand outstripped the company\u2019s initial supply.<\/p>\n <\/p>\n Unlucky customers were greeted with the news that they would still get a new iPhone…in four weeks.<\/p>\n The trillion-dollar company – considered a world leader in supply chain management – was confronted by backorders.<\/p>\n While backorders are no fun for customers, they\u2019re sometimes good news for companies. Backorders can be a sign that a product is in high demand and that brand loyalty is strong.<\/p>\n In Apple\u2019s case, backordered items mean that customers who had failed to show enthusiasm for the previous iPhone 8 had simply been waiting for the X to launch.<\/p>\n However, a customer\u2019s eagerness to get their hands on a product can quickly turn into frustration.<\/p>\n That frustration might lead customers to look elsewhere for backordered items, giving competitors a chance to win them over. If competitors are successful, the customer\u2019s brand loyalty is compromised.<\/p>\n When they\u2019re few and far between, backorders are a positive sign that your business is doing well. When backorders are frequent, they\u2019re a sign that you have poor inventory management processes or that your management practices are too <\/i>lean.<\/p>\n <\/p>\n Contents<\/p>\n <\/p>\n BONUS:<\/strong> Before you read further, download our Warehouse Management Software Whitepaper to see how Logiwa uses real-time data to help you get up to 100% inventory accuracy and execute advanced fulfillment strategies like wave planning.<\/a><\/p>\n A backorder occurs when a customer orders something that your supplier <\/i>does not have or your manufacturer <\/i>has not yet produced.<\/p>\n It sounds like a stock out, but there\u2019s a subtle difference. A stock out is when you don\u2019t have an item available in your inventory. For ecommerce companies<\/a>, this may mean that an item isn\u2019t available at their warehouse.<\/p>\n When an item is on backorder though, it means that your supplier doesn\u2019t even have it. They need to reach out to their manufacturer for more, causing even longer lead times.<\/p>\n If you receive your goods directly from a manufacturer, your backorder processing is longer because you have to wait for the manufacturer to produce more. This was the issue for Apple. Their iPhone X relied on highly specialized, scarce components<\/a> for its edge-to-edge OLED screen and 3D camera.<\/p>\n Backorder processing can have a noticeable impact on your entire supply chain. In fact, researchers have identified backorders as one of the sources of the bullwhip effect<\/a>.<\/p>\n The bullwhip effect, also known as the Forrester effect, refers to the tendency of a supply chain to over- or under-react to demand changes (also known as order variability) at the customer level.<\/p>\n For example, if there\u2019s a reported 5% increase in customer demand, suppliers and manufacturers throughout the supply chain overreact by operating as if there\u2019s been an increase of 40%. This leads to overproduction and excess inventory.<\/p>\n On the other hand, if there\u2019s a reported 5% decrease in customer demand, suppliers and manufacturers throughout the supply chain react as if there\u2019s been a decrease of 40%. This leads to underproduction, stock outs, and poor customer service.<\/p>\n The best way to understand the bullwhip effect is to think about an actual bullwhip and how a small stimulus on one end results in larger waves throughout the length of the whip.<\/p>\n The flick of the handler\u2019s wrist is the customer order. The waves that grow larger and larger along the length of the whip are the upstream supply chain partners reacting to the initial stimulus.<\/p>\n Well, consider the different partners (or stages) within a supply chain. In a straightforward supply chain, you\u2019d have:<\/p>\n The retailer puts in an order with a wholesaler based on the number of customer orders it receives. To have a small buffer stock (aka stock out inventory) the retailer may order a few more units than needed.<\/p>\n The wholesaler uses this order from the retailer to inform its own orders from the distributor.<\/p>\n But now, this number is further inflated. In addition to fulfilling the base orders (the amount actually <\/i>ordered by customers) plus the retailer\u2019s buffer stock, he\u2019s also throwing in additional orders of his own to ensure he <\/i>has buffer stock.<\/p>\n This behavior continues up the supply chain until the order volumes are inflated far beyond the initial customer demand.<\/p>\n The same thing happens with a sudden decrease in demand. Partners along the supply chain become increasingly cautious and under-<\/i>order to protect themselves, even though the retailer already factored this decreased demand into its order.<\/p>\n Why do these unnecessary amplifications happen? There are many reasons, but usually it\u2019s because agents make decisions about upstream orders without consulting their downstream partners.<\/p>\n In other words, a wholesaler will make assumptions about how much to order from his distributor (upstream partner) without consulting with his retailer (downstream partner).<\/p>\n Consider how the bullwhip effect, caused by backorders, might affect the different functions and activities within your own supply chain operations.<\/p>\n\n
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Backorder Meaning: What Is a Backorder?<\/h2>\n
How Does Backorder Processing Affect Your Supply Chain?<\/h2>\n
How Does This Happen?<\/h3>\n
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